Approach Resources Inc. BUY

COMPANY DESCRIPTION:
Approach Resources is an independent energy company engaged in the exploration, development, production and acquisition of unconventional natural gas and oil properties onshore in the US. The company focuses on finding and developing high-quality, long-lived resource plays.
All amounts in US$ unless otherwise noted.

Energy — Oil and Gas, Exploration and ProductionLOWERING PRICE TARGET ON NAV AND ESTIMATE REDUCTIONS; STOCK LOOKS OVERSOLDInvestment recommendation
AREX is a pure play Permian name, with 149K net mostly contiguous acres in the southern Midland Basin. After several flat quarters, production should grow nicely in Q4/13, while costs continue to come down. As AREX accelerates development in the horizontal Wolfcamp, we expect the gap between the current stock price and our NAV to narrow.

Investment highlights
 AREX announced 14 well completions for Q3 vs. only 12 in all of H1/13. The completions were back end loaded, resulting in an exit rate from the quarter of 11.1 Mboe/d. There were some notable completions during the quarter, including the Baker B 256H (Wolfcamp B) in central Pangea, which IP’d at 1,334 Boe/d, the company’s best initial producer to date.
 AREX exited Q3/13 with ~$340M in liquidity, consisting of a $315M undrawn borrowing base and $25M of cash. Subsequent to the end of the quarter, the company closed the sale of the Wildcat oil pipeline and got an increase in the borrowing base to $350M, resulting in pro forma liquidity of $477M, which comfortably covers the ~$265M of outspend we are modeling through the end of 2014.